Question

The newspaper reported last week that Bennington Enterprises earned $28 million this year. The report also stated that the firm�s return on equity is 15 percent. Bennington retains 70 percent of its earnings.
Required:
(a)
What is the firm's earnings growth rate?



(b)
What will firm's next year's earnings be?

Answer 1

Answer: a). Firm's growth rate = 10.5%

b). Next year's earnings = $30,940,000.00

Explanation: Earnings growth rate is the percentage change in earnings given specific variables.

The firm's earnings growth rate g = Return on equity (ROE) × Retained earnings (b) = 0.15(0.70)

g =0.105 or 10.5%

In finding next year's earnings, we multiply the current earnings times one plus the growth rate.

Next year's earnings = Current earnings(1 + g)

Next year's earnings = 28,000,000(1 + 0.105)

Next year's earnings = $30,940,000.00

Answer 2

Answer:

The firm's earnings growth rate is 10.5%

Firm next year's earnings is $30.94 million

Explanation:

The formula for earnings growth rate is given as returns on equity multiplied by retained earnings

return on equity is given as 15%

retained earnings =$28 million *70%

Retained earnings=$19.6 million

Earnings growth rate=70%*15%

Earnings growth rate =10.50%

Firm next year's earnings =this year earnings*(1+earnings growth rate)

Firm next year's earnings =$28m*(1+0.105)

                                            =$30.94 million

Retained earnings next year could be computed $30.94*70%=$21.66 million

Since the earnings next year is believed to increase to $30.94 million, it implies that even though the payout as dividends is not increasing in percentage terms but increasing in dollar terms